* Liffe July trades at premium to future-dated contracts
* Exporters cautious on sales contracts for early 2012/13
By Sarah McFarlane
LONDON, May 29 Cocoa processors and chocolate
makers are stockpiling supplies of beans on fears the London
market could face a temporary supply crunch if top producer
Ivory Coast's overhaul of the sector delays exports later this
The cocoa industry is concerned the reform could leave
exporters with uncovered costs and fail to improve the incomes
of hundreds of thousands of struggling farmers, and as a result
that the 2012/13 season could get off to a slow start.
European processors and chocolate makers have been reluctant
to release beans from their stocks onto the futures market in
case of any problems with the new season, which begins on Oct.
1, dealers said.
"They're frightened of releasing stock to the futures market
and then having to pay an awful lot more to get it back later on
when they need it," said Jonathan Parkman, joint head of
agriculture at broker Marex Spectron.
The concerns over delays have not pushed up overall cocoa
prices but instead have affected the structure of the NYSE Liffe
futures market, with nearby contracts trading at
premiums to later-dated contracts.
Liffe July cocoa futures are trading at a 52 pound
($81.66) per tonne premium to March futures. Usually
nearby contracts trade at a discount, because longer-dated
contracts take into account the cost of holding the commodity
A premium on nearby futures contracts typically suggests
tight supplies, but after a record global cocoa surplus in
2010/11, dealers say that on this occasion it reflects
uncertainty over Ivory Coast's new system.
"The market is not the way it is because of a real physical
shortage, it's based on a perceived physical shortage, but I
believe that perception will be proved to be wrong," said Derek
Chambers, head of cocoa at France-based commodities firm Sucden
(Groupe Sucres et Denrees).
"I think there's going to be a lot more cocoa available in
October and November than the market needs; manufacturers are
being quite rightly cautious and holding onto stocks."
Exporters are also exercising caution with their sales
"The way that we and other exporters are selling the new
crop is not to put our head in a noose. You sell
November/December shipment; you don't sell first half of October
shipment," said Chambers.
Under Ivory Coast's new system, the government will set a
guaranteed price for farmers for the 2012/13 season starting
Cocoa traders and the Ivorian government are expected to
wrangle over the costs of getting cocoa from the bush to ports
for months to come, however. Plus some farmers could resort to
smuggling if they are unhappy with the price, so there's
uncertainty over the timing of exports from the next crop.
"Farmers will sell. It's a question of who they sell to. If
they sell to the government at the fixed price, there's no
issue," said Parkman.
"If the market price has run up significantly and by
transporting the cocoa out of Ivory Coast illegally and
smuggling it out through neighbouring countries the farmer is
able to achieve a much higher price, then the central marketing
system may be short of cocoa to fulfil the contracts which
they've sold previously."
The government has been negotiating with traders since
February on the costs of transporting beans from the bush to
ports and the scale of reimbursement, and some are sceptical
that an agreement will be reached by the target date of Sept.
"It's going to drag on beyond the 15th and the early weeks
of the season. Exporters who have contracts to deliver Ivory
Coast beans at early dates will have to buy from farmers without
knowing what their evacuation costs," said Steven Haws of cocoa
research firm Commodities Risk Analysis (CRA).
The negotiations are particularly difficult because there
are costs that the government can't acknowledge, including the
bribes that exporters must pay at roadblocks, Haws added.
Police and army roadblocks, used to extort money from
motorists, add to the costs of transporting cocoa along Ivory
Coast's main transport routes, which are used to carry around
half of the country's total production to port.
The steady drawdown of exchange-graded stocks is
contributing to the inverted structure of the futures market,
although global stocks remain high following the record surplus.
Valid cocoa stocks in NYSE Liffe's nominated warehouses
totalled 64,260 tonnes as of May 14, according to exchange data.
Marex Spectron estimates world cocoa stocks will total
around 1.89 million tonnes at the end of the 2011/12 season.
"We're not talking about a shortage of cocoa overall. Last
year we had a massive surplus. This is very much about the
discrepancy between the amount of graded certified cocoa and the
willingness of holders of the other physical cocoa stocks to
release these stocks onto the futures market because of the
uncertainty about the Ivory Coast situation," said Parkman.
Exporters hedge their exports by selling futures contracts
short, and if they are uncertain about when cocoa will reach
Europe, they will want to place their hedges as far forward as
possible, which is also weighing on the prices of later-dated
"Everyone is hedging their Ivorian cocoa in March, which is
why March is weak relative to September and December," said a
European soft commodities analyst.
"The nearby structure tells you there are worries and they
are not going to be resolved until the cocoa starts flowing."
This is not the first time in recent years that the Liffe
futures market has become inverted.
In 2010, a hedge fund run by Armajaro Asset Management
caused a stir in the cocoa market when it took delivery of
almost all available Liffe stocks, helping drive the spot
contract to a 32-year high.
"There hasn't been any activity that I have seen that would
suggest that somebody has built up an exceptionally long
position as happened in 2010," said Haws of CRA.
($1 = 0.6368 British pounds)
(Editing by Veronica Brown and Jane Baird)